A global recession seems to be looming over investors. According to a probability model run by The Conference Board in October 2022, there is a 96% likelihood of a recession in the U.S. within the next 12 months. Expectedly, investors are spooked, and rightly so: Interest rates have increased, down payments have disappeared, and retirement timelines have shifted. The markets are constantly changing and have proven to be unpredictable.
An unpredictable and unstable market can easily impact our emotional state and lead us to make rash decisions. These rash decisions are common. According to a study by MagnifyMoney, 66% of investors have made an impulsive or emotionally charged investing decision they later regretted. Even experienced investors with firm goals, focused exclusively on long-term growth, can become impulsive and reactionary when faced with changing variables like market movements, low company earnings and corporate actions.
This is not to say that we should exclusively do nothing during market volatility. Once we acknowledge that the impulse to sell right away during a downturn is governed by our emotions, we can begin to view market downturns as an opportunity to reflect on our strengths and weaknesses as investors, evaluate changing opportunities and double down on our long-term goals.
In my experience, there are five important investing choices investors can make during volatile times. Which of the following actions an investor should take depends entirely on their current portfolio, economic goals and lifestyle.
1. Investors Can Adjust Their Portfolio Targets.
This is a good fit for investors who, when going through a downturn, realized that their portfolio choices were riskier than they actually have appetite for. They can adjust their investment options to be more conservative, shift assets into high-yielding savings and checking accounts and/or pay down debt.
Higher-risk portfolios tend to be equity heavy, while a conservative approach may favor bonds. One could use the Modern Portfolio Theory as a benchmark when assessing risk and building out their portfolio.
Sponsored Content
2. Investors Can Invest More and Buy the Dip.
This is for the investor who is secure in their financial stability and recognizes the great buying opportunity available for them. These investors tend to park their cash in brokerage accounts, automating their contributions.
On M1, this looks like using auto-invest or Smart Transfers on a schedule that works for them. We see a range of recurring transfers weekly, biweekly, monthly and beyond.
Sponsored Content
3. Investors Can Take Advantage of the Dip by Moving Positions.
The strategy of “moving positions” is similar to buying the dip, but takes it one step further — by moving positions to be in stocks that will benefit once the market bounces back up. For example, an expensive stock that an investor might not usually be able to afford will become cheaper during the dip, allowing them to buy into something they wouldn’t be able to under normal circumstances.
This move should solely be done by an investor who has researched objective factors, analyzed risk and carefully weighed the pros and cons. Consider macro factors that may affect the new position, prior performance during downturns and industry benchmark.
Sponsored Content
4. Investors Can Cautiously Sell.
In most cases, this is the right move for a very small subsector of investors — those who believe the big dip is still coming and want to hold everything as cash or cash alternatives until the danger subsides and plan on re-entering once the markets have stabilized.
Selling, of course, could minimize your taxes at the end of the year if you sell at a loss and decrease your end-of-year tax burden. This will also release you from a potential loss in capital if you believe the price will decrease in the future and could minimize your capital loss overall.
However, when you sell your security, you will lose your proportionate share of ownership and the rights to any potential dividends or capital gains in the future.
Sponsored Content
5. Lastly, and Maybe Most Important, Investors Can Do Nothing.
This is for the investor who is confident that, despite any temporary volatility, their portfolio will stay the course. Oftentimes, this is a fit for an experienced investor who has weathered previous downturns, coming out the other side still standing.
The choices that investors make during periods of volatility are highly personal. It’s impossible to say that one investment move can work for everyone. However, decades of economic research show that investors shouldn’t base their decision to buy, sell or adjust their portfolio based on emotional reasoning.
The bottom line is to understand your options and do your own research. Long-term conviction will help you weather downturns, market corrections and the human side of you that just wants to react.
Often (and with hindsight’s benefit), small, thoughtful moves can pay dividends in the long run.
--
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Sponsored Content
-
Stock Market Today: Dow Rises 854 Points From Its Intraday LowIf there's one thing markets hate, it's uncertainty. But uncertainty is all they're getting these days.
-
Are You a Retirement Millionaire Too Scared To Spend?If you are too scared to spend money in retirement, you may be saddled with regret. Here are three ways to safely enjoy your sizable retirement nest egg.
-
Seven Questions to Ask When Evaluating Personal Loan OptionsTaking out a personal loan too hastily could lock you into unfavorable terms with an untrustworthy lender. Ask these questions before signing anything.
-
The Three Biggest Fears Keeping Retirees Up at NightHere are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
-
What Can a Donor-Advised Fund Do for You? (A Lot)DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
-
Estate Planning When You Have International AssetsEstate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
-
Three Essential Estate Planning Steps to Protect Your Nest EggAfter dedicating years to building your wealth and securing your future, make sure your assets are protected and your loved ones are provided for in the future.
-
Is Chasing the American Dream Ruining Your Financial Life?Too many people focus on visible affluence as a marker of success. Here's how to avoid succumbing to the pressure and driving yourself into debt.
-
Retiring With a Pension? Four Things to KnowThe road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
-
How to Teach Your Kids About the Tax Facts of LifeTaxes are unavoidable, so it's important to teach children what to expect. Also, does your child need to file a tax return for 2024? Find out here.
